One Trade, Two Housing Bubbles, And The Greatest Speculative Mania In History

The prevailing wisdom is that there are two great housing bubbles out there today – Australia and Canada. I don’t need to post any data about the scale of the rise over the past decade, or the worrisome level of debt – everyone knows it. Yet skeptics have been calling for the pricking of these bubbles for what seems an eternity. The only people that have looked more foolish are the Bitcoin bubble callers.

I don’t know if 2018 will be the year that these housing bubbles finally burst. But I know Australia has gone over 25 years without a recession, and that with their main trading partner China tapping on the brakes (This Cycle – it’s China!), the chances of an accident are increasing.

Contrast that to Canada. Her main trading partner is the United States. Whereas China is working on slowing down her economy, the United States is throwing gasoline on already decently burning fire. Almost a decade too late, the fiscal purse-strings are being opened as Republicans implement a pro-cyclical tax cut even though we are more than 8 years into a recovery with the economy humming along nicely (at least on a relative basis).

The world’s two biggest economies are taking exact opposite tacks. Regardless of which you policy you believe correct, their diverging policies present an opportunity to short the AUD/CAD cross rate.

But has the market already figured this out?

The AUD/CAD cross rate has declined from 1.03 this summer, all the way down to the present 0.965. So is the trade all-baked-in?

I don’t think so. Have a look at the longer term picture.

You might be asking yourself if I am making this overcomplicated. If I am bullish on US and bearish on China, shouldn’t I just execute my trades in the originating market? Maybe I should, but I believe AUD/CAD is a better way to play it. China’s engineered slow down will be accompanied by tighter monetary policy and a higher Yuan. So that makes shorting CNH a non-starter for me. As for buying the US, unfortunately, the US dollar’s performance is often more based on its role as the reserve currency, and the rate of global credit creation or destruction means more than actual US economic activity. Buying CAD, which is also a commodity based currency, is a purer counterparty to the Australian dollar short.

But the real reason I love this trade? I am long term bullish on energy. And the Loonie is much more of a petro-currency than the Aussie dollar. I will write this up more in the coming days, yet this is the added tailwind that makes me want to short AUD/CAD down here, even though it looks short-term oversold.

And the final kicker? I am a big US real estate bull. Although I understand Canadian housing returns are independent of US real estate, at the margin, a robust American housing market will cushion the Canadian correction. Contrast that to China, where the government is most likely purposely slowing housing’s appreciation. With Australia overdue for a recession, combined with their slightly more precarious debt levels, and most importantly, their main trading partner tightening monetary conditions, the Australian real estate market is more vulnerable than Canada’s. They are both at nosebleed levels, but I think Australia is more likely to get punched in the face.

Putting it all together, I am shorting AUD/CAD as a longer term trade.

Bitcoin – gold 1980 redux?

One of my favourite trader war stories comes from Jim Rogers. In the late 1970’s, Jimmy was long gold (I know, shock!) In the early months of 1980, gold went parabolic. Traders were scrambling to buy their inflation hedge, and just-get-me-in orders were flooding the exchanges. Well, sensing the mania was getting out of hand, Rogers pulled out some pink tickets. He was within two days of the high. Problem was, he was 60% early in terms of price…

This week’s Bitcoin rally reminds me of that period.

The trouble with my analogy? The moment you translate the chart to a percentage return scale, you realize we are talking about two very different magnitudes of rallies.

Boys and girls, timestamp this moment in your mind. This Bitcoin rally is truly historic.

An interesting part of this phenomenon? As Bitcoin has rallied, more people believe it to be undervalued and less claim it’s a bubble. Have a look at the results of a series of polls taken by the must-follow Charlie Bilello over the past year (click on the picture to see details):

I’ll just leave this thought with the immortal words of John Templeton;

Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.

Speaking of euphoria, I saw this great tweet from Stephen Burns that I had to share.

I know the Bitcoin-believers “know” this time is different, and this is the dawn of a new revolution.

Well, I guess you can count me in the old-school non-believers. The other day I was listening to Bill Fleckenstein on Jim Grant’s podcast, and as usual, Fleck articulated my concerns much better than I ever could:

…if you can overcome the intellectual hurdle of the fact that the amount of bitcoins is supposed to be limited, yet the number of potential forks is unlimited, and the fact that the number of potential alternative crypto currencies is infinite and oh by the way, the block chain is what most people yap about, yet you don’t own it. I submit if you can overlook all of those things, and ignore that it has gone from 28 cents to [16,000] dollars, then [yeah, it’s great…]

Yet all of these concerns are currently moot. Full blown mania has enveloped the public. And although I was not nearly smart enough to be long, I am enjoying watching the madness of crowds. As a student of the markets, this is one for the history books.

Winter olympics

It’s not getting a lot of play in the news, but in the new year, the 2018 Winter Olympics are set for Feb 9th-25th in PyeongChang, South Korea. Take a look at how close it is the North Korean border.

It’s been a long time since the market has worried about little-rocket-boy, but he’s still there, spouting nonsense:

SEOUL (Reuters) – Large joint drills by the U.S. and South Korean militaries and U.S. threats of a preemptive war against Pyongyang have made outbreak of war on the Korean peninsula ‘an established fact, a spokesman for the North’s foreign ministry said.

“The remaining question now is: when will the war break out?” the spokesman said late on Wednesday in a statement carried by its official KCNA news agency.

“We do not wish for a war but shall not hide from it, and should the U.S. miscalculate our patience and light the fuse for a nuclear war, we will surely make the U.S. dearly pay the consequences with our mighty nuclear force which we have consistently strengthened.”

I am not predicting war by any means. I just think that at some point in the coming couple of months, the Winter Olympics will be a worry for the markets.

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1 comment on “One Trade, Two Housing Bubbles, And The Greatest Speculative Mania In History”

There is time for Bitcoin to become a bigger bubble, of course, but I’d argue that the French-born Mississippi bubble was even larger. Using nothing more than paper promising undiscovered riches, the progenitor of the Mississippi bubble took over the sovereign debt and currency circulation responsibilities for the entire French economy as well as was granted monopoly power over several significant industries. The speculation also engulfed all of the major French aristocracy and the landed and commercial wealth of the nation – whereas I don’t believe with Bitcoin the “old money” has gotten involved to a significant degree, significantly mitigating the potential impact of the inevitable exhaustion. In other words, only in the most narrow historical sense –
using our lifetimes as a measuring stick – could Bitcoin be thought of as the “Greatest Speculative Mania in History.”